LIHTC Working Group Proposes LIHTC Property Owners Be Allowed to Charge Rent for Exempt Units

Published by Michael Novogradac on Thursday, May 10, 2012 - 12:00am

In a recent letter to the IRS, the LIHTC Working Group proposes allowing owners to charge rents on low-income housing tax credit exempt units, such as manager and maintenance units. The group argues that charging rent should not disqualify the units under Section 42. The group also suggests that these units, whether free of rent or not, should not be included in the applicable fraction.

“Treasury regulations and Revenue Ruling 92-61 both specify that units for resident managers or maintenance personnel that are reasonably required for a project are not considered residential rental units but instead are residential rental property. Consequently, exempt units are residential rental property and not residential rental units and therefore are not included in the calculation of the applicable fraction of a building,” said Michael Morrison, CPA, a partner in Novogradac & Company LLP’s San Francisco office, who leads the Working Group’s efforts.

This is important because the applicable fraction is determined by the number or size of the residential rental units, and because exempt units are deemed residential rental property and not residential rental units they are not included in the calculation of the applicable fraction of a building.

The LIHTC Working Group agrees that while exempt units are included in eligible basis and excluded from the applicable fraction, it does not believe that a unit must be rent free in order for it to qualify as reasonably required.

We are unable to find in legislative history a requirement that the manager has to live in the unit as a ‘condition of employment.’ Treasury regulations indicates only that the manager unit be reasonably required, which is a completely different test than a condition of employment. Additionally, we have been unable to find language that indicates that charging rent for a manager’s unit will disqualify its status as a residential rental property.

The economics of charging rent to a manager residing in a project and giving free rent to a manager residing in a project are essentially the same. A manager who has free rent is essentially paying rent because he or she is typically paid less than a manager who does not receive free rent.

For more details and a copy of the letter, please go to www.lihtcworkinggroup.com.